3Q volume guides lower for both upstream (~2%) and downstream (~3%)In what was largely a mirror image of past quarterly results, inline productionresults and lower than expected forward guidance supported the macro outlookon 2Q results, as the commodity continues to grind around the $50/bbl level.L48volumes have shifted to the right once again in what's starting to becometrend, placing increased pressure on implied 4Q volumes in order to achieve FYproduction targets. One constant is costs (3%/11% LOE/Capex beats) continuetrend lower, and should continue with 2H17inflation now expected to be minimalas volumes (eventually) accelerate. On the downstream front, cracks are off tostrong start (+17% Q/Q ex WC) as product inventories continue to draw (thougha declining pace) and throughput volumes are expected down 3% q/q. We remaincautious into 4Q however as a turnaround heavy 1Q implies elevated throughputsamid a backdrop of slowing demand and declining inventory draws.Lower 3Q guides leave steeper rise into 4Q, supporting commodity at ~$50/bblProduction is accelerating a bit slower than originally anticipated, as 1H17rigramps look to be hitting L48volumes harder in 4Q than in 3Q. We now anticipatesequential growth of 4.3%/6.4% vs. a prior 6.0%/4.6%, resulting in a reductionour implied L482018growth of ~150mb/d, to ~1.05mmbbl/d. The implicationa lower than expected L48volume trajectory (combined with sustained pressureon US product inventories since the end of June) have helped support oil at theOPEC targeted ~$50/bbl level. However, the impact on equities has been lesspositive. The smaller 3Q ramps put increased pressure on 4Q volumes to achievefull year targets, where we see execution as high risk at MUR, NBL, OXY, andQEP. Those set up well to execute include DVN, CLR, and EOG.Capex/LOE beat by ~11%/3%, expect minimal upward pressure in 2H17While not the biggest surprise that capex beat our 2Q estimates (11%) given theactivity ramp expected to hit in the back half of the year, downward revisionsMRO ($250mm) and DVN ($100mm) while leaving activity unchanged (andmodest FY production guide raise from MRO), speak to the efficiencies gainedfor two of our buy rated names. In total capex was reduced by ~$2bn acrossour coverage, and combined with commentary that pointed to minimal inflationin 2h17(vs. prior expected 1015%), this demonstrates the potential for furthersavings as momentum picks up. On the operating front, LOE beat by ~3%largely inline volumes. With natural gas prices trending down and productionacceleration on the horizon, we expect pressure to remain on the downside foroperating costs.

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